Privatizing Public Transit Lowers Costs And Saves Cities Money

The financial plight of many U.S. cities has caught the attention of the Democratic presidential candidates, as both Hilary Clinton and Bernie Sanders discussed urban issues during their recent debate in Brooklyn. Both candidates supported the idea of investing in city housing and infrastructure using federal tax dollars. But before any additional U.S. taxpayer money is redistributed to cities, city officials should be required to take steps to shore up their city’s finances. A good place to start is the privatization of public transit.

A new NBER working paper compares the efficiency of local governments by looking at the costs of providing public bus transit. The authors calculate that fully privatized bus transit would have resulted in cost savings of approximately $5.7 billion in 2011, which was 30% of total U.S. bus transit operating expenses that year. Furthermore, the increased use of bus transit that would occur due to lower prices would generate a welfare gain of $524 million. The positive effects of privatization would be largest in areas where union power is strongest. The study also provides evidence that the cost savings of privatization do not come at the expense of lower quality or reductions in service.

The figure below is from the paper and shows the positive correlation between union strength in a state and bus service operating costs per vehicle mile. States with strong union bargaining rights (the dashed line) have higher operating costs per mile on average and costs grew faster from 2002 to 2012.

Source: Jerch, Rhiannon, Matthew E. Kahn, Shanjun Li. “Efficient Local Government Service Provision: The Role of Privatization and Public Sector Unions”. NBER working paper 22088, March 2016.

The authors explain that transit unions increase costs in two different ways. First, they place substantial limits on the use of part-time workers. These limits make it difficult for transit agencies to increase the number of workers during peak rush hours and decrease the number of workers during the midday lull. Ultimately these restrictions require unionized transit agencies to hire more drivers and mechanics than necessary for a given level of service.

Second, unions are able to negotiate for wages above the market rate. Private, competitive firms have an incentive to minimize costs and consequently will be tough negotiators, while public officials tend to acquiesce at the bargaining table since transit unions are a powerful constituency in local politics.

This research has important implications for U.S. public transit. In New York City the transit group the Riders Alliance has launched a Fair Fares campaign for the purpose of obtaining discounted bus and subway fares for lower-income residents. This campaign might be unnecessary if New York City officials lowered costs by privatizing more of the city’s public transit network.

The Washington D.C. metro is also in financial trouble, with a projected $150 million shortfall in 2018. Representatives from the Washington D.C. Metro Board recently requested $300 million per year from federal taxpayers to fund operations. But again, this federal subsidy might not be necessary if the Washington Metropolitan Area Transit Authority (WMATA) privatized its bus operations since that would make more resources available for the metro. Or better yet, the WMATA could privatize both operations and lower costs across the board.

Advocacy groups and progressive politicians are often receptive to providing subsidies to poorer transit riders but tend to be less willing to implement real cost-saving measures such as more privatization. The result is that residents of places like New York City not only pay more for the same quality of transit available in other cities, but are also asked to fund subsidies to poorer residents who are priced out by the high costs. This double burden could be reduced or potentially eliminated if officials in large, union-heavy cities let private companies that have the benefits of economies of scale and superior negotiation skills operate the city’s transit system. Privatization would also free up resources for other government responsibilities like local roads, schools and public pension funding.

Before more federal dollars are distributed to cities local officials should be required to cut costs, even if doing so is politically uncomfortable, and public-transit privatization is a way to do that.